Ground Charges
Ground charges, often referred to as ground rent, were payments that leaseholders made to the freeholder or landlord as part of a lease agreement prior to 30 June 2022.
The Leasehold Reform (Ground Rent) Act, which is the first of a two-part programme of legislation to reform the leasehold system under the previous Conservative government, now means that if any ground rent is demanded as part of a new residential long lease, it cannot be charged at more than the cost of one peppercorn per year. This is known as ‘peppercorn ground rent’ and effectively sets the rate to zero.
At Lawhive, we specialise in handling ground charge disputes and providing expert advice to both landlords and tenants. Our network of lawyers is committed to assisting you with all aspects of ground charges, from understanding your obligations to resolving disputes efficiently and fairly.
Contact Lawhive today for professional assistance with ground charges and ensure your rights and interests are protected.
What are ground charges, and why are they imposed?
Ground charges, also known as ground rent, are charges that leaseholders pay to their freeholder – usually paid annually for long leases. Your landlord does not have to provide a service in return for this.
If your lease was granted before 30 June 2022, you don't have to pay ground rent unless your landlord has sent you a formal, written demand for it. Your landlord can ask you for any unpaid ground rent going back 6 years - and they can ask you for the full amount in one go.
Further, your landlord can only increase the ground rent if you agree to the increase or the lease says this can happen.
If your lease was granted on or after 30 June 2022, you can't be charged anything more than a ‘peppercorn’ ground rent. The value of this is zero so you will not have to pay anything, but it does form a legally binding contract with your landlord.
If you bought a lease from another leaseholder on or after 30 June 2022 you do still have to pay ground rent to your landlord if this is in your lease. The changes only apply to new leases granted on or after 30 June 2022.
Why are ground charges imposed?
Ground charges have historical roots, originally reflecting the fact that leaseholders were renting the land on which their property stood. The freeholder retained ownership of the land.
Ground charges provide a regular income for freeholders. This income can be used for various purposes, such as maintaining common areas, managing the property, or simply as a revenue stream.
The terms and amount of ground charges are usually specified in the lease agreement. Leaseholders agree to these charges as part of the lease terms when they purchase the leasehold property.
In some cases, ground charges may contribute to the cost of fulfilling the freeholder's obligations, such as insuring the building or maintaining common parts and shared facilities.
What is the difference between ground rent and service charges?
Ground Rent | Service Charges | |
|---|---|---|
Definition | Ground rent is a fee paid by the leaseholder to the freeholder for the land on which the property stands. It is a condition of the lease agreement. | Service charges are fees paid by the leaseholder to cover the costs of maintaining and managing the building and common areas. |
Purpose | This fee is essentially for the leaseholder's right to occupy the land. It does not cover any maintenance or services provided by the freeholder. | These charges cover expenses such as repairs, cleaning, maintenance of communal areas, insurance, and sometimes the salaries of staff involved in managing the property. |
Amount | Ground rent is usually a fixed amount specified in the lease agreement. | The amount of service charges can vary annually and is usually calculated based on the actual costs incurred by the freeholder or managing agent. |
Payment Frequency | Ground rent is typically paid annually, although some leases may specify different payment intervals. | Service charges are often paid quarterly or bi-annually, but the exact schedule can vary depending on the lease agreement. |
Obligations | Failure to pay ground rent can result in penalties and, in extreme cases, forfeiture of the lease. | Leaseholders should receive a detailed breakdown of the service charges, including how the money is being spent. Leaseholders have the right to challenge unreasonable service charges. |
What are the legal obligations of landlords regarding ground charges?
Landlords, also known as freeholders, have specific legal obligations with ground charges to ensure transparency and fairness in their dealings with leaseholders. These obligations have been updated under the Leasehold Reform (Ground Rent) Act 2022.
Landlords must provide a written demand for ground rent. This demand must clearly state the amount due, the due date, and the period it covers. It should also include the landlord’s name and address.
The demand must be sent at least 30 days before the payment is due, giving leaseholders adequate time to prepare for the payment.
Plus, ground charges must be fair and reasonable. Excessive or unfair ground charges can be challenged by the leaseholder in a First-tier Tribunal (Property Chamber).
The amount and frequency of ground rent charges must comply with the terms specified in the lease agreement. Any changes to these terms usually require agreement from the leaseholder. And, landlords cannot arbitrarily increase ground rent beyond the provisions stated in the lease agreement - any increase must follow the terms set out in the lease.
Landlords also can't penalise leaseholders for not paying ground rent if a proper demand has not been issued. Leaseholders therefore do have the right to challenge unreasonable or improperly demanded ground rent through a tribunal.
Importantly, landlords can only seek forfeiture of the lease for non-payment of ground rent if the rent is overdue for more than three years or exceeds a certain threshold. Even then, they must follow strict legal procedures.
Common ground charge issues and their resolutions
Ground charge issues can create significant tension between landlords and leaseholders.
Here are some common problems and their potential resolutions:
1. Unreasonable ground rent increases
Landlords may attempt to increase ground rent beyond what is considered reasonable or beyond the terms set out in the lease agreement.
Leaseholders can challenge unreasonable increases by referring the matter to a First-tier Tribunal (Property Chamber). The tribunal can assess whether the increase complies with the lease terms and is reasonable.
2. Disputes over service charges
Disagreements may arise over the amount and reasonableness of service charges levied by the landlord for maintaining the property and common areas.
Leaseholders have the right to request a detailed breakdown of service charges and to inspect receipts and invoices. If charges seem unreasonable, leaseholders can challenge them through a First-tier Tribunal.
3. Failure to pay ground charges
If leaseholders fail to pay ground charges, landlords may take legal action to recover the owed amounts, which can lead to penalties or forfeiture of the lease.
Leaseholders should address ground charge demands promptly to avoid penalties. If payment is genuinely disputed or unaffordable, communicating with the landlord to arrange a payment plan or seeking legal advice on defending against unjustified demands is advisable. In cases of non-payment, landlords must follow proper legal procedures before taking severe actions like lease forfeiture.
4. Transparency
Lack of transparency in how service and estate charges are calculated and spent can cause mistrust and disputes between leaseholders and landlords.
Landlords are required to provide detailed annual statements and be transparent about how service and estate charges are calculated and spent.
Leaseholders can request to inspect accounts and receipts related to these charges. If transparency is lacking, leaseholders can apply to a tribunal for an audit or a review of the charges.
Can ground charges be included in the rent for a leasehold property?
Ground charges, also known as ground rent, are separate from the rent paid for occupying a leasehold property. They are separate financial obligations, and leaseholders are required to pay them in addition to their regular rent.
The Leasehold Reform (Ground Rent) Act 2022 mandates that ground charges should be distinct from rent. Ground charges are often a nominal fee, especially for new long residential leases starting from 30 June 2022, which are set to "peppercorn" rent (effectively zero financial value).
Landlords must clearly distinguish between ground rent and the rent for occupying the property in the lease agreement. This ensures transparency and prevents confusion over what each payment covers.
The lease agreement should specify the amounts and payment schedules for both rent and ground charges separately and leaseholders should review their lease agreement carefully to understand their financial obligations.
How often should landlords review and update ground charges?
Landlords should review ground charges annually or as specified in the lease agreement, ensuring updates comply with the Leasehold Reform (Ground Rent) Act 2022 and other relevant legislation.
The specific frequency and conditions for updating ground charges are usually outlined in the lease agreement. Some leases may specify review periods such as every 5 or 10 years.
For existing leases that do not fall under the 2022 Act, landlords must adhere to the review and increase terms specified in the lease agreements. Any updates must be reasonable and justifiable.
For new long residential leases starting from 30 June 2022, ground rent is set to "peppercorn rent" (effectively zero), meaning there should be no financial ground rent to review or update for these leases. Landlords must ensure any updates or charges comply with this Act.
While the ground rent for most new leases is set to zero, landlords managing older leases should consider economic factors like inflation and market conditions during reviews. However, any increases must be within the limits set by the lease agreement and be reasonable.
When updating ground charges, landlords must provide adequate notice to leaseholders. This notice should include the new charge amount, the basis for the update, and how it was calculated.
Can a landlord increase ground rent without tenant consent?
Under the Leasehold Reform (Ground Rent) Act 2022 and other relevant regulations, landlords have limited ability to increase ground rent without tenant consent.
This means any increases in ground rent must be explicitly outlined in the lease agreement. This includes the frequency and amount of permissible increases.
If the lease specifies fixed terms and conditions for ground rent increases, landlords must adhere to these terms. They cannot impose increases beyond what is stated in the lease.
For new long residential leases starting from 30 June 2022, ground rent is set to "peppercorn rent" (effectively zero), meaning landlords cannot increase ground rent for these leases.
For existing leases not covered by the 2022 Act, landlords must follow the terms set in the lease agreement and cannot arbitrarily increase ground rent.
What protections do tenants have against unfair ground charges?
For new long residential leases starting from 30 June 2022, ground rent is set to "peppercorn rent," effectively zero. This means no financial ground rent is required for most new leases, protecting tenants from unfair increases.
While the Act primarily affects new leases, it emphasises the need for transparency and fairness in ground rent charges.
Ground rent increases must adhere to the terms specified in the lease agreement. If the lease does not explicitly allow increases, landlords can't impose them unilaterally. As such, any changes to ground rent terms typically require the mutual agreement of both the landlord and the tenant.
Furthermore, lease forfeiture for non-payment of ground rent is subject to strict legal conditions. The rent must be overdue for more than three years or exceed a specific threshold before forfeiture can be considered. Even then, landlords must follow legal procedures.
Tenants can challenge unfair ground rent charges through the First-tier Tribunal. The tribunal assesses whether the charges are reasonable and in line with the lease terms.
Tenants have the right to seek legal advice and representation if they believe the ground rent demands are unjustified.
What should tenants do if they receive a demand for unpaid ground charges?
Receiving a demand for unpaid ground charges can be stressful, so carefully review the demand notice for ground charges and make sure it includes the correct amount, the period it covers, and the due date.
Then, check if you have received all necessary documents, such as the Energy Performance Certificate (EPC), Gas Safety Certificate, and the "How to Rent" guide, if applicable.
Next, contact your landlord to clarify any discrepancies or questions about the demand. Sometimes, misunderstandings can be resolved through direct communication. If you are unable to pay the full amount immediately, discuss the possibility of setting up a payment plan.
If you believe the demand is unfair or incorrect, seek legal advice. A solicitor can help you understand your rights and advise on the best course of action.
If you believe the ground charges are unreasonable, you can challenge them through the First-tier Tribunal. The tribunal can assess the reasonableness and legality of the charges.
To avoid penalties or legal action, pay any ground charges that are valid and comply with the lease agreement, and keep records of all payments made.
What should I do if my landlord fails to provide a breakdown of service charges?
If your landlord fails to provide a breakdown of service charges, send a written request to your landlord or managing agent asking for a detailed breakdown of the service charges. Clearly state that you need a comprehensive list of expenses and how the charges are calculated.
Remember to keep copies of all correspondence for your records. This documentation may be useful if you need to take further action.
If you do not receive a response within a reasonable time, send a follow-up request. Highlight your previous communication and reiterate your need for the information.
If your landlord continues to ignore your requests, seek legal advice. A solicitor can help you understand your rights and the next steps. You can apply to the First-tier Tribunal (Property Chamber) for a determination. The tribunal can order the landlord to provide the information and assess the reasonableness of the charges.
In some cases, you can report the issue to your local council’s housing department - they may be able to intervene and assist in obtaining the required information.